Happy Sunday everyone. This will be the last Sunday Reads of 2024, and I wanted to wish you all a very enjoyable and hopefully relaxing end to the year. I’ve enjoyed writing these pieces this year and more importantly feel very privileged to have had some excellent guest writers. Expect to see more like this in 2025!
On the back of a successful U.S. Presidential election, we have seen President Trump bang the drum harder on tariffs. Here in Canada the reaction has been quite strong to the fear of 25% trade tariffs put on Canadian exports into the U.S., especially as approximately ¾ of Canadian exports are to the U.S.
Tariffs have become mainstream news and have hit social media with this clip from Ferris Bueller’s Day Off making the rounds. As a side note, the actor in the scene is Ben Stein. Not only was he the host of “Win Ben Stein’s Money” but also was a speechwriter for both Presidents Nixon and Carter. Here we can see the economics class learn about the Smoot-Hawley Act of 1930. The act was used to enforce tariffs on over 20,000 goods in order to protect U.S. based businesses recover from the Great Depression.
Donald Trump isn’t the first U.S. President to push for tariffs. In fact, the first time that tariffs were imposed by the U.S. on imports was under George Washington with the Tariff Act of 1790. The advice to impose tariffs on imports came from Alexander Hamilton (subject of the hit Broadway show). Hamilton was concerned that the nascent U.S. textile market couldn’t compete with the low-cost imports from Great Britain. These tariffs were placed not primarily to raise tax revenues but to protect domestic producers.
As a side note, Alexander Hamilton was in fact the first Secretary of the Treasury of the United States. Over the last week we found out that Scott Bessent will be the 79th Secretary of the Treasury. Scott Bessent has a very interesting history as a financial trader, including playing a key role alongside George Soros in ‘breaking the Bank of England’ (see “Shake It Off”). Today the role has key challenges and Mr. Bessent will be charged with the financing of the debt load of the United States.
Tariffs
So, what are tariffs, how do they work, and what are their economic impacts?
Tariffs are in effect taxes on imports. Tariffs are enforced for two reasons: tax revenue and protective. In the instance of tax revenue, the tariffs are in place to increase government coffers from the import tax. For most countries, tax revenue as a rationale for tariffs is quite minimal. For example, 41% of U.S. tax revenues were in tariffs in 1900 but that number is closer to 2.5% today.
Protective tariffs are in place to enforce security around domestic businesses. By instituting tariffs for this rationale, the expectation is that domestic consumers may switch to domestically (non-taxed) products instead of those imported and taxed. These were the types of tariffs used by the United States in the last 18th and early 19th centuries.
President Trump seems to be using tariffs as a combination of tax revenue source, protection for domestic producers and most importantly as a negotiating tool with trading partners.
Economic Impacts
Tariffs are taxes and they do increase prices. Increases in prices do erode demand, decreasing the total revenue from sales of said product. Some of that revenue goes to the government in the form of tax revenue but there is dead weight loss from a revenue perspective. It also means there is a surplus from the foreign producers who see an erosion in their demand.
Are Tariffs Inflationary?
At the heart of it, if tariffs increase the prices to domestic consumers, then they are inflationary. However, there was an interesting comment from Scott Bessent. He was quoted as saying that although tariffs do cause one-time increases in prices, they are not a source of inflation. Inflation has its roots in government expenditures and the money supply. There cannot be inflation at a society level unless there is an increase in the money supply through issuance of currency or an increase in government indebtedness.
In the end we Canadians can all hope that the latest tariff threats are a negotiating ploy from President Trump and that we can come to a more reasonable solution.
Much like Ferris Bueller, I hope all of you get some days off over the next few weeks! We’ll see you all in 2025.
